The Bank of New York is cooperating with the Agricultural Bank of China to develop open-end mutual funds there, the Bank of New York announced last month. The two banks have signed a memorandum of cooperation such that the Bank of New York will provide technological backup and training to Agricultural Bank of China so it can establish an open-end investment fund system, the bank said.
The deal is just the beginning of a long process to develop open-end funds inChina," according to the Bank of New York.
In order to be included in the World Trade Organization, China is required to develop an open-end mutual fund system, said Tienan Zheng, an analyst with Cerulli Associates of Boston.
"Once the WTO deal is finalized, hopefully, early next year, the whole financial sector will gradually open to the outside," she said. "Opening' the financial sector means opening the service sector, including banking, the capital market, etc."
For the first three years, foreign financial service firms must form partnerships in which they have no more than a 33 percent stake, said Zheng. After the third year and up to the fifth year, foreign firms will be allowed to control 49 percent of partnerships. After five years, foreign firms may be able to set up independently, she said.
The conditions China must adhere to in order to be included in the WTO were outlined in the bilateral agreement China signed with the Clinton administration last March.
China already has about 36 closed-end funds, Zheng said. Closed-end funds have been in China since 1998, but their performance and popularity is not that strong because of the structure of the funds and also because the expertise and the investment culture in China is new, she said. Another factor that has impeded the development of the fund industry in China is the government's policy to tightly control funds' operations, she said.
"[Bank of New York's] cooperation with the Agricultural Bank of China is the first step in a long process," said Ken Lopian, a spokesperson with the Bank of New York. "We have been expanding our existing custody business in China and this is a natural outgrowth of discussions and the relationship that we've had with them for some time." Bank of New York has a branch office in Shanghai.
The agreement between the two banks is designed to assist the Chinese in gaining insight into what is required to run and operate an open-end mutual fund in China, said Lopian.
"This is not the establishment of a fund itself," he said. "This is more of an infrastructure exercise as it relates to the technology, to the process and all of the requirements of running a mutual fund."
No date has been set for the introduction of open-end funds in China, Lopian said.
"We have had our focus in China for a while," Lopian said. "Our specialization is servicing securities and providing the infrastructure that allows mutual funds to work both in the U.S. and Europe. And we see China as a country where, on a long-term basis, there's potentially large development in that market. So, we wanted to get in on the ground floor."
